PORTUGAL: Going Underground in Hard Times

LISBON, Jan 28 2012 (IPS) - The underground economy in Portugal is booming thanks to the steep increases in taxation and prices demanded by a “troika” of international creditors to address the country’s economic crisis. In May 2011, the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB) loaned Portugal the equivalent of 103 billion dollars as a financial rescue package.

In return, the troika imposed draconian conditions on middle- and lower-income sectors of the population, and headed by the IMF took on a supervisory role over this southern European country’s economy.

Sheer survival instinct among those most affected by the austerity measures is driving them further into the parallel economy, which according to recent official figures amounted to 24.8 percent of GDP in 2010.

And it is continuing to grow, owing to the severe economic crisis from which there seems to be no way out, a study from the Faculty of Economics of the University of Porto concludes.

There are still no statistics for 2011, but economists who have analysed the situation and made their findings public concur that the informal economy grew last year, and is expected to grow again in 2012.

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The rise of the informal economy mirrors the ongoing decline of the formal economy, amid rumours of a probable new tax hike that has still not been confirmed or denied by the rightwing government of Prime Minister Pedro Passos Coelho.

Rising prices, taxes, social security contributions and unemployment, along with cuts in social benefits and health care, are the main drivers behind the flight to the underground economy.

Activities in the parallel economy are not registered in the statistics tracking the country’s wealth. One-quarter of economic production is left out of Portugal’s GDP, which is nominally 223.7 billion dollars a year, says the University of Porto study, released this month.

The underground economy generates more than 52.6 billion dollars a year – half the amount of the international troika’s bailout plan.

The study indicates that the size of the unreported economy in Portugal is larger than average for the Organisation for Economic Development (OECD) countries, where it varies between 16 and 18 percent of GDP.

Portugal has the third largest underground economy relative to GDP in the EU, after Italy and Greece.

What all three countries have in common, and helps to explain the state of their economies, is high indirect taxation, high direct taxes on consumption and high unemployment, the study says.

Therefore, market competition between businesses is distorted and there is greater uncertainty about the stabilisation of the economy, it says.

In 1970, when the first studies were done on the black economy, its activities had a value of 9.3 percent of GDP. By 2010 it had grown to 24.8 percent of GDP – a gain of 15.5 percentage points in four decades.

Detailed analysis of the data leads to the conclusion that if taxes were paid in the parallel economy, Portugal’s fiscal deficit, which was 9.1 percent of GDP in 2010, would have been reduced to 2.9 percent of GDP.

Portugal’s deficit was the fourth largest within the eurozone, after Ireland, Greece and Spain.

Leaving tax revenue aside, simply adding the underground economy to the country’s declared GDP would have resulted in a deficit of 6.9 percent of GDP, 2.2 percentage points less than the 9.1 percent reported.

The distortion of economic statistics arising from the black economy has a negative impact, including downgrading by financial rating agencies like Moody’s, Fitch Ratings and Standard and Poor’s, which grade the viability of government bonds issued on the international market, based on official economic information.

All three agencies have consigned Portugal to the lowest grade, explaining that their recommendations are based on the oversized sovereign debt, which is 83 percent of GDP.

This, they say, is too high and they forecast that Portugal will not be able to pay it. Their verdict hampers new debt title issues from Lisbon, and when it does issue bonds, the interest rates are exorbitant.

Unmoved by these considerations, however, small and medium enterprises (SMEs) continue to dodge taxes, especially value added tax (VAT) which was raised from 18 to 23 percent over the past three years.

What business can earn a profit margin of 23 percent? is the question SMEs raise.

Few or none, they reply for themselves, so they pin their chances of survival on evading VAT completely, or only declaring half the value of their real business transactions. The same thing happens among independent workers and in the construction trade or repair services.

For their part, independent health professionals ask, when it is time for payment, “With or without an invoice?” and most often their fee is paid in cash, leaving no trace.

A very well-known dentist from Estoril, a city close to Lisbon, told IPS, “The only people who ask me for legal receipts are those who are already paying high premiums for private health insurance.”

Two or three years ago one had to make an appointment to see this dentist at least a month in advance. “Now, the waiting time is only two or three days, because people only go to the dentist when they can’t stand the pain any more,” he said.

Car mechanic Reginaldo Godoy held a similar view, as he complained to IPS that “business is very bad.”

“Previously, customers would try to keep their cars in good condition, having the brakes or the steering checked regularly. Now they only come when they have no alternative, like when they have been in a crash, or the engine isn’t working at all,” he said.

The crisis has also caused the government to redouble efforts to raise revenue, resorting to innovative solutions like huge vehicle inspection operations by the police.

A short trip to the supermarket frequently pits the car owner against a massive deployment of police at roundabouts, where they check drivers’ licenses, car registration, and the contents of trunks, in the hope of catching them in breach of some law.

Meanwhile, in neighbourhoods a long way from the big cities and in rural villages, citizens are complaining to the media that there is a dire shortage of law enforcement agents to deal with the surge in burglaries and muggings.

The Interior Ministry reported this month, with considerable satisfaction, that in 2011 police collected 105 million dollars in fines from car drivers.